Bonds, Selling Before Maturity

Dec. 14, 2010

Investors who hold a bond to maturity (when it becomes due) get back the face value or "par value" of the bond. But investors who sell a bond before it matures may get a far different amount. For example, if interest rates have risen since the bond was purchased, the bondholder may have to sell at a discount—below par. But if interest rates have fallen, the bondholder may be able to sell at a premium above par.

If you want to sell your bond before it matures, you may have to pay a commission for the transaction or your broker may take a "markdown." A markdown is an amount—usually a percentage—by which your broker reduces the sales price to cover the cost of the transaction and make a profit on it.

You should ask your broker how much the markdown is before you sell a bond. You may also want to compare the cost of selling a bond at more than one brokerage firm. The markdown and the price of the bond may vary from firm to firm. Bonds that are actively traded may have lower markdowns. Brokers typically do not list their markdowns separately on the confirmation statement they send to customers.

For more information about interest rates and bond prices, see our Investor Bulletin on interest rate risk.